DealZone

For M&A bankers, 2008 is perhaps best remembered using the catchphrase of Comic Book Guy from The Simpsons: “Worst. Year. Ever.”
    
Dealmaking reached record lows in 2008, dominated by cancelled deals. At the start of 2009, questions linger about several companies, executives and deals. Most notably, though, there is a big question mark over private equity.     

Last year was a bad year for PE firms as credit markets became too tight, stocks fell unpredictably low, and deals that were announced in better times began falling apart.  PE deals fell to a five-year low.

The ‘Golden Age’ of PE quickly faded as many of the biggest buyouts announced in 2007 collapsed in 2008, including the $41 billion deal for Canadian telecommunications operator BCE, the largest announced buyout in history.    

And many of the deals that did close are lining up to file for bankruptcy. Leverage – the backbone of PE deals — should be hard to come by for some time. And with the IPO market still frozen, firms will likely be holding on to their purchases much longer.    

Attention-shy Cerberus struggled this year with two bad bets –GMAC and Chrysler. The government stepped in to help the auto industry – and Cerberus benefitted too.   

To terminate its $6.5 billion deal to buy Huntsman, Apollo Management’s Hexion Specialty Chemicals had to cough up $1 billion in fees and charges. This follows the long-awaited collapse of the private equity bid for Canada’s BCE last week, which cost buyers C$1.2 billion in break-up charges.

Hexion agreed to buy Huntsman in July 2007. The deal faltered amid the credit crisis. Apollo tried to walk away, citing insolvency concerns about the combined company.

But with a hefty break-up fee in its pocket – almost as much as its diminished $1.4 billion market cap – Huntsman is looking to settle what could be an even bigger score.

Even in death, the BCE deal appears to be headed back to court. The C$34.8 billion ($27.8 billion) buyout of Canada’s biggest telecoms company had a C$1.2 billion termination fee. But the buyers — investors led by the Ontario Teachers’ Pension Plan — say they don’t owe BCE a thing because the company would have been suffocated by debt if the deal had gone through. After a long night when the deal finally died, BCE this morning is saying it wants the money.

The writing was scratched on the phone booth wall long before independent adviser KPMG handed down its opinion that a buyout would result in a debt load that would make BCE insolvent. That killed the deal. But think back to June, when BCE debt holders sued to block the deal, arguing that the value of their investments had fallen so low as to make a sale unfair to them.

Though the suit failed after getting all the way to Canada’s supreme court, the idea that bondholders could somehow have a say on whether a company could sell itself was a shot heard ’round the M&A world. Stock investors also sued over their dividends. The deal was dealt the black spot and now it is dead.

One beneficiary of Citi’s massive bailout was BCE Inc, the massive telecoms company that is being bought in one of the last remaining leveraged buyouts to close.
Citigroup, alongside TD Securities, a unit of TD Bank Deutsche Bank and Royal Bank of Scotland, is financing the deal and the market has been nervous about the buyout cratering for months — evidenced by significant arbitrage spread.

One of the biggest worries for traders is the C$34.8 billion deal closing amid the turbulence in the financing markets.

But they gave the firmer footing for Citi a thumbs up and shares in BCE shot up 3.4 percent after the U.S. government agreed a bailout package for the bank.

Drumroll, please: Almost two years after radio station and billboard company Clear Channel Communications began exploring strategic options, its $17.9 billion takeover finally closed on Wednesday.

The deal, slowed by legal battles in two states and negotiations to lower the purchase price, became a symbol of the buyout industry’s glory days and the subsequent struggles of the credit crunch.

Clear Channel had agreed to be acquired by private equity firms Thomas H. Lee Partners and Bain Capital Partners last year. The market quickly changed and credit to fund the acquisition became more costly and difficult to secure.

Japan’s Sumitomo Mitsui Financial Group may invest about $926 million in British bank Barclays, people familiar with the matter told Reuters, the latest in a string of subprime-hit Western lenders increasingly turning to Asia for funding. Japan’s third-largest bank is also considering a business alliance in Asia with Barclays, which is expected to raise about $8 billion from sovereign wealth funds and other investors and then offer shareholders the right to buy on the same terms. If Sumitomo Mitsui opts to invest it would give the Japanese bank a stake of just over 2 percent. Up to five outside investors are also expected to participate, and backers may include existing Singapore-based sovereign wealth fund Temasek and China Development Bank, plus the Qatar Investment Authority.

Steve Ballmer insisted Microsoft will not seek to make a spate of other Internet acquisitions (Facebook, we’re looking at you) in the wake of its failed bid for Yahoo, according to the Financial Times. “People don’t understand what they’re talking about,” Ballmer said. “At the end of the day, this is about the ad platform. This is not about just any one of the applications.” Meanwhile, over at Yahoo, a spate of executives are reported running for the hills, just as the company is trying to justify its decision to go it alone and to repel Carl Icahn’s proxy fight. Among the departed: Flickr co-creator Stuart Butterfield, whose bizarrely hilarious resignation letter could best be summed up as: “There Will Be Tin.”

The fate of the world’s largest leveraged buyout hangs in the balance ahead of Friday afternoon’s decision by the Supreme Court of Canada on whether BCE treated its bondholders unfairly in agreeing to a $34.8 billion ($34.5 billion) takeover. Ontario Teachers’ Pension Plan, with U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity, are offering C$42.75 a share to take BCE, parent of Bell Canada, private.

Banks financing the $34.8 billion private equity buyout of BCE have been hammering away all weekend to win higher interest rates, tighter loan restrictions and stronger protections that far exceed the original terms, according to the New York Times. Citing people on both sides of the transaction, the paper said talks began to fray late on Friday but lasted all weekend. “It’s patently obvious that the banks have no intention of closing the deal,” said one executive who read the revised terms. Investors have long worried that the massive private equity buyout might be repriced, delayed or abandoned altogether. Looming over the discussions is the spectre of the Clear Channel deal, in which some of the very same lenders also tried to back out, producing an ugly tangle of court cases that was only resolved last week.

Microsoft said it proposed an alternative deal to Yahoo rather than a full acquisition, but a person who knows the mind of Carl Icahn, the man driving trying to unseat Yahoo’s board, said the move was likely to prompt the billionaire investor to nudge Yahoo back toward Google. This source isn’t just familiar with the matter, but has a taste for rustic allusions: “Microsoft is trying to get the milk without buying the cow, and if you look at Icahn’s history, he has never been used that way.” Microsoft did not clarify what that alternative deal might be.

Facebook founder and CEO Mark Zuckerberg stressed his company’s independent spirit, after a report said the social networking site might be sold to software giant Microsoft, which is hunting for ways to beef up its Internet business. “You can tell, from our history and what we’ve done, that we really wanted to keep the company independent, by focusing on building and focusing on the long-term,” Zuckerberg told Reuters while in Japan to launch a Japanese language version of Facebook. Microsoft already has a small stake and the Wall Street Journal said this month the software giant, with the Yahoo deal in limbo, had approached Facebook to gauge its interest in a full takeover.